Morning Note - Gold + Silver hit new highs

by James Gerrish 06 April 2011

** 06/04/11  - 8.14am  -  by James Gerrish** 

(Click to View Charts)       S&P/ASX 200  (Australia) -  Dow Jones Industrial Average (US)     -     FTSE 100 (UK) 
 
  • The RBA kept rates unchanged yesterday at 4.75% which came as no real surprise to the market. 
  • Inflation is in check at the moment with Core Inflation actually down this quarter - that’s the number you get when you strip out Petrol, Food and Electricity - basically all the things that are going up in price! 
  • Still, I said at the start of the year that inflation is going to be a term we hear a lot about this year and I'm still very confident that this will be the case. 
  • An example last night was the price action in Gold & Silver which traded at new highs - Gold/Silver are hedges against inflation and if you ask John Paulson, the famous US hedge fund manager that made $5 billion shorting Subprime mortgages, he thinks gold will be trading at $4000 an ounce.
  • He's backing this theme with almost 80% of his fortune in Gold. Incidentally, if it happens, he'll become the richest man in the world by some margin! 
  • In an inflationary environment, we want to hold companies with physical assets - whether it be commodity produces or companies with property holdings or plant and equipment. Put simply, inflation will push up the cost of these assets because its going to cost more tomorrow to build something than it did today. 
  • In overseas markets last night, we saw the DOW JONES drift -6 points or -0.05% lower to close at 12393. 
  • Locally, the FUTURES markets are pricing in a  modest drop of -3 points when trading kicks off this morning
 
  • We've had a great bounce in equities since the Japanese disaster with the local market higher 12 out of the last 13 trading days. 
  • When this happens, I tend to think that we're nearer some type of short term weakness or profit taking at least. Whether this plays out or not only time will tell but if it does, I'm of the belief that it will be shallow and short term at  worst - and will give another strong point to top up on stocks. 
  • 5000 on the S&P/ASX 200 seems likely in the next couple of weeks and the catalyst I think will be another strong reporting season in the US + continued action in the M&A space.
  • Yesterday we saw China raise interest rates by 0.25%, taking the benchmark rate to 3.25%. In the past, the market has taken any move by China to cool its economy as a negative and expectations of a rapid slow down have hit the wires. 
  • In recent times, these concerns have lost heat and I think there has been continued evidence that shows China is managing growth and inflation pressures in a measured way 
  • The Benchmark interest rate is at 3.25%! That’s incredibly low for an economy that’s been growing at near 10% - expect more rate rises to come but I wouldn't be getting too spooked by them at this stage.
  • On a stock specific level, I think the market may give us an opportunity in the next week or so to pick up some quality companies - that have a strong chance of moving in the near term. 
  • I recently outlined the themes that I'm quite keen on at the moment, one of these being Mining Services. 
  • This stems from the significant level of Capital Expenditure planned by Australian miners. 
  • BHP is spending $80 billion+ over the next 5 years - RIO is doubled its capex spend this year to $11 billion and has plans to ad 50% to its iron ore production over the next 5 years while FMG has  $8.4 billion worth of  investment in the pipeline. 
  • Bradken (BKN) is a stock that I think has some legs at current prices. (SEE CHART)
  • After being sold down 18%, the stock has found support around $7.20 and is showing signs of upside momentum. 
  • When you drill into why the stock has been so unloved, I think it’s more to do with its exposure in rail and the negative sentiment around this courtesy of Downer Edi (DOW). 
  • This was amplified by headline results that missed the market but underlying performance of key divisions in mining and engineering were strong. 
  • Its trading on 12.5 times forward earnings against sector average of about 14.5 times and 12 month price targets are sitting >$9.50. 
  • One word of note is that gearing is relatively high with debt to equity at 60.9%. 
  • Buy once it breaks from its recent consolidation area. 

Disclaimer

James Gerrish is an Authorised Representative (Rep No. 352904) of Shaw Stockbroking Limited ("Shaw Stockbroking"). Shaw Stockbroking is a holder of Australian Financial Services Licence No 236048. Shaw Stockbroking, its directors, officers, associates and employees each declare that they, from time to time, may hold interests in financial products and/or earn brokerage, commission, fees or other benefits from financial products mentioned in this e-mail or attached documents. Unless specifically stated within this page or an attached document, any information communicated by this e-mail constitutes unsolicited general financial product advice which has been compiled without regard to any investor's individual objectives, financial situation or needs. It is not specific advice for any particular investor. Before making any decision about the information provided, you need to consider the appropriateness of this information having regard to your individual objectives, financial situation and needs and consult your adviser. Any indicative information and assumptions used here are summarised and also may change without notice to you, particularly if based on past performance or relate to a future matter.
 

Subscribe to our Daily Newsletter?

Would you like to receive our daily news to your inbox?